Audit-Rules Convergence Plays Catch-Up

Settling on a single set of auditing standards worldwide gets a lot less attention than the commingling of accounting standards, but is gaining ground.Sarah Johnson, CFO.com | USApril 8, 2008

The large accounting firms have been building the welcome wagon for international financial reporting standards over the past year, encouraging American companies to pay attention to the possibility that IFRS could one day replace U.S. GAAP.

Many accounting observers believe the widespread adoption of IFRS in the United States is the most realistic way to advance the goal of making financial statements more comparable worldwide. Already, more than 100 countries have adopted some form of the International Accounting Standards Board's version of IFRS in recent years, buoyed by the European Union's adoption of the rules beginning with their members' 2005 financial statements.

But hiding behind the ardent attention U.S. and international standard-setters and regulators have paid to the convergence of accounting rules is a slower movement toward another global set of rules: the guidelines auditors use to review financial statements. The International Auditing and Assurance Standards Board (IAASB) is pushing hard for progress in that area, and boasts that — like IFRS — more than 100 countries have either adopted its rules or have based local rules on them.

The IAASB believes auditing convergence could have the same benefits as the IFRS movement. It could increase the ability of all companies to raise capital globally and reduce the number of redundant audit reports done for global firms, says Jim Sylph, executive director of professional standards for the International Federation of Accountants, whose standards-setting body is the IAASB. As it is, companies listed under stock exchanges in more than one country may have to have their financial statements audited under both IAASB's standards and the U.S. generally accepted auditing standards.

Of course, the United States is one of the countries that hasn't accepted the international auditing standards. Auditors of U.S. public companies use the Public Company Accounting Oversight Board's standards, and private-company auditors reference the rules of the American Institute of Certified Public Accountants. All of the standard-setters are in contact with one another and are in discussions to make their rules more similar — or at least have agreed to avoid making new rules that significantly diverge.

"We would like to foresee the day when the standards that the PCAOB issues and we issue are somehow combined or converged or harmonized," Sylph told CFO.com. "How that process might take place is a matter of time."

PCAOB board member Charles Niemeier says the auditing convergence process is in the discussion phase. He attributes the slow progress in large part to a lack of political and regulatory pressure for the convergence of U.S. and international rules to move forward. In addition, notes Sylph, the number of people affected by auditing standards is much smaller than those using the accounting rules, so it's harder for his convergence project to garner the same attention as the work between the IASB and FASB.

The U.S. and international auditing standards are already very similar, according to Barry Jay Epstein, a partner at Russell Novak & Co., an accounting and litigation consultancy. The more pressing concern, he says, is how those standards are enforced worldwide. For now, the interpretation of IFRS varies from country to country, which each has its own regulatory body that reviews companies' financial statements. Observers' worries about the consistent application of IFRS have prompted calls for a consolidated, supranational securities regulator; however, that concept has not gained much traction.

In the meantime, IFRS-GAAP convergence has been moving steadily since U.S. and international standard-setters officially kicked off the project five years ago. And, to be sure, their work can be completed and put in place before the convergence of auditing standards.

At the same time, U.S. auditors have some work to do before they could deal with a proliferation of IFRS-prepared financial statements by U.S.-based companies, if the Securities and Exchange Commission gives such an allowance, as it is expected to do this spring. (Companies based in countries that use the IASB version of IFRS are already allowed to do the same for their U.S. filings.)

The Big Four accounting firms claim they can quickly take on auditing IFRS-prepared financial statements because some of their staffs have already had exposure to the international rules from their work abroad. Still, the majority of their experience has been with the American generally accepted accounting principles, and the smaller accounting firms have done even less work with IFRS. For those reasons, the day of an immediate switchover from U.S. GAAP to IFRS is far off, says Tom Ray, chief auditor at the PCAOB. "It will certainly take us some time for the entire profession to get educated, and more people need to get more experience in applying IFRS," he told CFO.com.

That education at universities — which is just starting to get under way, albeit slowly — will also occur for regulators, including the PCAOB. The audit firms' watchdog has already begun to be exposed to IFRS through its inspections of firms that audit foreign private issuers. It is also working on training its staff on IFRS and may have to shift its priorities if the SEC allows U.S. companies to use the international standards.

"The board would have to evaluate the need for any additional adjustments to its programs and consider the need for new initiatives to prepare for such a significant transition in financial reporting and address any concomitant risks related to public company auditing," the PCAOB wrote in its most recent strategic plan for the next five years.